Five Not-so-Fun Facts about FICO

You scraped and saved. You worked hard and made sacrifices. Now you're finally ready to buy your dream house or car. But first you need a loan. It's time for fantasy to face reality - in the form of your FICO score.

Most credit reporting agencies use a system established by the Fair Isaac Corporation to derive your three-digit credit score. Many consumers believe the credit scoring process is totally fair, objective and error free. They may also be unaware of the legal power they have over their own credit scores.

Here are five lesser-known facts about FICO scores:

1. Credit scores are not as objective as you might think.

The FICO system was actually conceived to eliminate unfairness in determining ones eligibility for credit. Before credit scoring, some lenders employed such tactics as sending an undercover agent to your door to make personal observations about your living habits, income level, race, sex, religion, etc. The Fair Credit Reporting Act now prohibits such practices.

Many consumers are aware of the basics of credit scoring that take into account an individual's credit history, payment habits, new credit inquiries and accounts, and current available credit. However, did you know the credit behavior of others can impact your credit score as well?

"Your credit score isn't just about you," says Dr. Randy Padawer, a clinical psychologist who has consulted for Lexington Law. Padawer's research into consumer credit has been featured in Smart Money Magazine and the bestselling FICO 850 seminar for The Motley Fool. "Rather, it's about you and others. More specifically, Fair Issac makes use of what they call 'Score Cards,' which group consumers according to whatever criteria they choose." Fair Issac uses statistical analysis regarding those groupings to predict future credit-related behavior, and your credit score is analyzed using such predictions.

2. Some experts question the legality of credit scoring practices.

"Because credit scores are predicated upon predictions rather than historical fact, some lawyers contend that the practice of providing credit scores to potential creditors, insurers and employers may well violate credit reporting laws," Padawer says. "It's an interesting civic issue with profound implications for the entire industry."

3. The actual formula for a credit score is a closely guarded secret.

Although consumers have a basic understanding of how a credit score is calculated, Fair Isaac does not reveal the exact formula used. "If they gave away their for-profit secret sauce, somebody's business plan would likely be threatened," Padawer says. "With so much at stake - mortgages, insurance policies, certain employment categories, car loans and more - consumers rightfully want to know specifics regarding how to improve their scores. Fair Isaac's pat answers, stuff like 'just pay everything on time and pay down your debt,' just doesn't satisfy."

4. Income and assets are not considered when calculating your credit score.

That's right - nowhere on your credit report will you see anything about your income or assets. It should be the job of a smart lender to consider these factors as well when determining your eligibility for a loan.

5. You have the legal right to challenge factors which influence your credit score.

You can, and should, take control of your credit score - even if you're not in the market for a home or auto loan. The Fair Credit Reporting Act gives you the right to access your credit report, learn your score and take action to improve it. One of the most effective ways to raise your credit score is to remove negative items from your credit report.

To learn more about how you can eliminate negative items and errors from your credit report, visit www.lexingtonlaw.com.

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